Your roof starts leaking. So, you hire a contractor to put in a new one. At the end of the job, you receive a piece of paper—an invoice—from the contractor billing you for their services. And if your business sells goods or services to customers and doesn’t collect money immediately, you’ll also have to send invoices. What is an invoice?
Invoices are key documents in business. In this article, we’ll go over:
- What is an invoice?
- What is the purpose of an invoice?
- Parts of an invoice
- How to create an invoice
- Example: Invoice template
What is an invoice?
An invoice is a bill sent to a customer after they receive a product or service. If a customer purchases something without paying immediately, you will send an invoice to collect payment. You might also receive invoices from your vendors if you purchase something on credit.
Businesses can distribute invoices electronically (known as e-invoicing), in person, or through the mail. You can give invoices to customers with a delivered product or after a certain number of days following a sale.
There are also different types of invoices for small business, including:
- Proforma invoice
- Interim invoice
- Final invoice
- Past due invoice
- Recurring invoice
The type of invoice you send depends on what action you want the customer to take, your business, and the circumstances of your sale. For example, you may send interim invoices to a customer while working on a large, ongoing project.
Invoice vs. estimate
If you send invoices to customers, you may also need to create and send estimates. But estimates and invoices aren’t the same.
An estimate is a document that goes over the approximate amount you plan on charging a customer. Typically, you create and send estimates before the project begins. Unlike an invoice, the estimate does not ask for payment.
Invoice vs. purchase order
A purchase order is a document buyers use to place an order with a seller. Whereas a seller creates an invoice to request payment from buyers, a buyer creates a purchase order to request a product or service from sellers.
What is the purpose of an invoice?
An invoice is more than a request for money. It also:
- Serves as a record for both you and your customer
- Helps you track accounts receivable
- Reminds customers to pay you
Serves as a record for both you and your customer
An invoice helps you stay organized and knowledgeable about sales and cash flow. It is also a record for the person receiving the bill.
If you use accrual accounting, record the invoice amount as accounts receivable (AR) in your books. Accounts receivable (AR) is any money owed to your business from a sale on credit. Invoices help you make sure your accounting books are accurate.
Helps you track accounts receivable
You can track invoice statuses through an aging of accounts receivable report. This report shows you the number of days payment is past due.
Reminds customers to pay you
When it comes down to it, an invoice is what leads to a payment from a customer. Without one, and without it done correctly, you could have slow cash flow. To get cash from customers, you need to remind them that they owe you money with an invoice.
You might need to send subsequent reminders if the customer won’t pay you. Continue to contact the customer (politely) if they have not paid past the due date. If a customer loses their invoice, send them another one.
Parts of an invoice
Clearly label an invoice so a customer knows what it is. All invoices should include the same basic information:
- Invoice date
- Customer information
- Seller information
- Goods and/or services purchased
- Total amount due
- Payment terms
- Invoice number
Include the date you created the invoice. This shows customers when you recorded the transaction. And, customers can use the date to determine their due date, especially if you offer an early payment discount.
The date will make it easier for you to stay on top of past-due customer invoices as you move them through your aging of accounts receivable report.
Who’s the customer you are billing? Include their information on the invoice for recordkeeping and to avoid confusion.
Clearly state the customer’s:
- Business (if applicable)
- Phone number
In addition to customer information, you should also include your business information on the invoice. That way, customers know who is billing them and can contact you if they have any questions.
Include your company’s:
- Email address
- Phone number
Goods and/or services purchased
What did the customer buy? A good description of the purchase will alleviate potential confusion.
Clearly label the:
- Products or services
- Pricing of each
Total amount due
After adding up the total and sales tax (if applicable), list out the total amount the customer owes you. If they paid part of the total at the time of purchase, make sure to account for that.
You invoice the customer … but they’re confused about how to pay. So, there’s a payment delay. Nobody wants that! Include invoice payment terms detailing everything a customer needs to know to make the payment.
Payment terms include:
- When the payment is due
- Payment methods you accept
- Where the customer can make checks payable to
- Early payment discounts, if applicable
When you create an invoice, be sure to number it. And, make a note of the number in your business records. A number will let you easily look up the invoice in the future.
Let’s say a customer calls with questions about what they owe. They can give you the number so you can find them in your system.
How to create an invoice
Regardless of how you invoice customers, you should understand the above parts of an invoice. It’s an integral document for collecting money, after all.
You can create an invoice by hand, with templates, or using accounting software.
Accounting software is the easiest way to create and track your invoices. For example, Patriot’s Accounting Premium lets you:
- Customize invoices (choose a template, add your logo, and select an accent color)
- Convert estimates to invoices
- Create and track unlimited customers and invoices
- Accept credit card payments when customers pay their invoices
- Set up recurring invoices
- Set up invoice payment reminders
Example: Invoice template
Here is a sample invoice:
Need help creating invoices? Patriot’s online accounting lets you create invoices with your business logo and email them to your customers. The software keeps records and generates reports so you can easily manage your invoices. Try it for free today!
This article has been updated from its original publication date of June 15, 2017.This is not intended as legal advice; for more information, please click here.